Investing in property Pt2.

Property investment Pt2. – Live-in Refurbishment

 

Probably the most affordable and common form of property investment is what I call “Live-in refurbishment”. It isn’t for the faint at heart, or those hoping to live in a palace at all times, but it can propel your net worth, while at the same time minimising your tax bill.

To put it as simply as I can, Live-in Refurbishment investing is to buy a property which is either in poor condition or otherwise undesirable. The purchaser will live-in the property as it is being improved (usually over an extended period) and eventually sell or re-mortgage what will then be a more expensive property.

Live-in refurbishment is the most common type of property investment for individuals who are hoping to get their foot on the ladder and increase the value of their investment over the period that they own it. It was my first type of property investment, and a number of my friends have had similar success with this method.

 

The first step in this journey is to know how far your finances will allow you to stretch your budget. Speaking to a mortgage broker can be invaluable. A good mortgage broker should be able to break down not only your affordability but also your possible costs for the upcoming, potential purchase. Once you have a budget in mind, you can start on the hunt for your purchase.

 

Location, location, location!

 

It is worth keeping in mind that unlike with almost every other type of property investment, you are going to be living in the property that you choose. So make sure you will be comfortable living there for a minimum of six months, but most likely a year or two. A mistake that many people make is to buy a property on the basis of it being a good deal, without thinking about the ramifications of residing there. If your personal or social life becomes affected by your choice of location, it is likely that you will feel disenfranchised with your investment which could cause you to make rash decisions during the refurbishment and eventual sale. If your work life is affected and it puts your bonus, commission or employment in jeopardy, then you could lose more than just your initial investment.

Once you are set on a location, it is time to do some research and identify keys areas that you would be interested in investing. Using the helpful tools on Rightmove and Zoopla, you will be able to find historical sale values along with property pictures and floor-plans. After a couple of hours’ of research, you should be in a position to pick up the phone and talk to local estate agents with some level of authority. You have your mortgage broker, you know your budget, and you have a reasonable grasp on what you can with your property. It is important to make it clear to the estate agents that you only want to purchase a property which you can add value to. Most estate agents are inherently hard of hearing, but the better the relationship you build; the more effective your search will be. As Sales Negotiator, the best developers (meaning the most successful) that I knew came into my office to chat with me at least once every couple of weeks. They knew me by name and would ask me how things were with me in the business as well as the market in general. Their approach meant that they were at the front of my mind when a good ‘deal’ came along. And as I had a long list of investors registered with me at any one time, their approach to me proved invaluable. This tactic wasn’t solely used by property investors; it also worked with domestic purchasers. Despite most opinions and stories that you will hear, estate agents do have emotions other than greed. So when a connection is formed with a potential purchaser, it is entirely possible the estate agent will work that little bit harder for them. If that fails, then there is always bribery!

 

After a few days and weeks, it is likely that you will stumble upon a potential purchase, property in a reasonable location with ‘potential’. It important at this stage to come to terms with what you are willing to live in, properties with ‘potential’ can range from a tired premises in need of a lick of paint and a new bathroom or kitchen to full refurbishment jobs that are barely habitable. Typically it is advisable to go with the former, especially if it is your first investment, but this depends on a few factors, chief amongst them is budget. If you can afford to spruce up the property while living elsewhere, and then move in and finish the job, then that is fantastic. But if you are like I was and on a shoestring budget, then you need to be able to feel comfortable moving straight into the property or possibly –also like me- moving back into your Mother’s house for a time.

 

The ultimate aim of this purchase is to make a profit, so we have to take a cold, hard look at the figures before making an offer and moving ahead with any purchase. It was all too common for purchasers when I was a Sales Negotiator to effectively overpay for a property because they wanted a ‘project’. A rough example of this would be a property on XYZ Road in good condition selling for £500,000 and a purchaser buying a ‘project’ on the same road for £480,000 even though it requires £40,000 worth of refurbishment to bring it in line with the property that sold for £500,000. If this is purely a commercial venture, then we have to be strict with the numbers. Always leave yourself a monetary buffer for unforeseen circumstances that may arise. The most seasoned professional is cautious of potential unaccounted for costs, and so you should be too.

To help you get a ballpark idea on your build costs, it is essential to call in a few professional tradespeople. It will almost certainly work out cheaper to have individual specialists in rather than a contractor who oversees the whole project. It is also much more likely that individual tradespeople will be comfortable with you helping them out while they are working. It may not be glamorous, but the goal is to keep your costs down and maximise your return, so keep yourself busy.

 

It is important during thing stage to not spend money where it is not needed. It is very easy to fall into the trap of spending money where you believe it should be spent, rather than where the ‘market’ would want to see it spent. I once met a budding developer who spent £10,000 on a kitchen work surface in a £300,000 flat because a developer he knew and admired did the same. It turns out that the developer that he admired was renovating a £2,000,000 family home in one of South West London’s well-known property hotspots. There is no better way to eliminate your profit margin then to spend money frivolously where it is not needed. Don’t be afraid to ask your newfound estate agent friends for their advice during this process, they will be highly motivated to provide you with free advise as you would have made them aware that you will be selling the property in the not so distant future. And that means more commission for them!

 

A note on purchasing costs.

 

As this is an almost complete commercial venture, it is essential to be realistic with yourself and take account of every pound spent when making your purchase. Stamp duty and solicitor’s fees are often the most considerable outlay, but there are also costs involved when arranging a mortgage that a lot of people don’t account for until they read their redemption statement upon selling the property. Be aware of any deferred costs and early exit charges that come into effect when redeeming your mortgage. One way to avoid early redemption penalties on your mortgage is to port your mortgage. This process involves selling your original property and simultaneously purchasing a new one. There may be an arrangement fee associated with this process, it should however pale in comparison to a redemption penalty.

 

 

As always, this is a basic overview of some of the aspects of this investment strategy. Some purchasers prefer to live in their completed project for a while to enjoy their hard work, and others choose to move on to a new (hopefully larger) venture straight away. Please feel free to get in contact if you require any further information, my social media accounts can be found on this page, and I will be happy to try and assist.

 

Patrick Henry

08/2018

Investing in property PT1: Buy-to-let

Property investment. Part 1: Buy-to-let.

“How should I invest in property?” Ask that question to 100 people and I all but guarantee that you will get 100 different answers. I still find myself asking that question to highly successful individuals in the hope of picking up some knowledge and ideas that hadn’t crossed my mind before. There is no harm in asking this question but keep in mind that every individual will have their own life plan and thoughts on how their investments should work for them.

The most common and I would argue the simplest form of property investment is through what is called ‘buy-to-let’ investment. To break it down to its simplest form, buy-to-let investing is to buy a property and rent it out for either short-term or long-term profits. I am going to attempt to address a few of the keys points in this blog and if you have any questions at all please do let me know.

 

I am often surprised at how little effort and research people put in to buy-to-let investments, there is much more to it than just buying a property and finding tenants that can cover your rent for you. A little foresight and research can multiply your profits over the period that you own the property.

So, let’s give the 4 W’s a look over (who, what, why, where).

 

Who: in this instance will be the tenants that you will find for the property. As you can imagine a family renting a house for a number of years is probably a more stable solution than students sharing a house for six months to a year. From experience, I can tell you that no two tenants are alike, and it is entirely possible that you can end up with an over demanding and careless family that could cost you more time and money than a sensible and practical set of students that care about the standards of their home. But when you are making a decision on the ‘Who’ you have to play the percentage game and look at generally who would be in a better tenant for you. So, when searching for a buy-to-let investment, make sure that you are aware of the demographic that is likely to occupy your property.

 

What: Probably the trickiest of the four W’s to get your head around, but because of that, it is probably the most important. Should you set your sights on a luxury apartment in a fully maintained development or stick to the status quo and choose a run of the mill family house? Do you buy a small three-bedroom flat 15 minutes’ walk from the station or a two-bedroom flat 5 minutes from the station? This is where your research must come into play and why it is helpful to become friendly with the local estate agents, especially the lettings department and managers. A lot of investors that I have worked with in the past have made the mistake of thinking that they can do all of their research online, sifting through pages of data on Rightmove and Zoopla until they form an opinion based on what is available at that specific time. There are a couple of problems with this approach, one is that the market can be extremely seasonal and what may look like a good rental property in July and August may be a very poor performing property for the rest of the year! Estate agents are still the most useful resource at your disposal. They will be able to tell you what properties are in short supply and what properties they have an abundance of. Rightmove and Zoopla may be able to tell you how many properties are online at any given moment, but it can’t tell you how many serious tenants there are looking at that property. Getting a grip on the supply and demand will prove invaluable when you come to let your property as it will minimise the chances of experiencing the dreaded “VOID PERIOD” (this is a time when the property is unoccupied, and the landlord is responsible for all on-going bills).

 

Why: by this, I mean ‘why are you doing this?’ there are plenty of investments that you could make and plenty of different routes that you can take in property investment. So, knowing why you are doing it is imperative if you are going to be happy with the results and ultimately make a successful investment. Most commonly people purchase buy-to-let investments because they would like a passive income, they would like an investment that is tried and tested that requires minimum input from them on a day-to-day basis. Then you have the buy-to-let investor who sees it as their first step to creating a property empire.

These two types of investors tend to approach their investments differently. The first set of investors will look for high rental yields in their investments (circa 8-10%) so that they have a cash flow from their investment monthly. Usually, these investments are in more affordable parts of the country or local to the investor’s area so that they can personally oversee the maintenance of the property themselves. As an example, let’s pretend that we have £75,000 to invest. In Peterlee (SR8) near where my dad is from, you can buy a two-bedroom house for around £75,000 and this property can be rented for around £480 per calendar month (PCM). With no mortgage that is a gross yield of 7.7% and if you were to strike a good deal, this yield could increase to 8%+. Over the past ten years, there has been an approximate uplift of £10,000 in the value of comparable properties. Using these crude figures, you can expect £57,600 in rental income and a £10,000 increase in property value over the course of ten years, which is £67,000 or 89.3% ROI (Return on investment). However, if you were to take that same £75,000 and invest in Sutton (SM1) where I was born. You could take that £75,000 and apply for a mortgage to buy a property worth £225,000. With a 30% deposit, you will be able to obtain a mortgage with an interest rate of around 3% making the monthly payments around £710 PCM. That same £225,000 property would rent for around £900 PCM (4.8% gross), which after you subtract your mortgage costs would be an income of £190 PCM. This same property has increased by approximately £75,000 over the past ten years. So, if history repeats (which it seldom does), after 10 years your investment will yield £22,800 in rent and £75,000 in capital growth, meaning a return on interest of 130.4%. So, the question of ‘Why’ really comes down to whether you would like a constant stream of money on a monthly basis or potentially more money after an extended period of time.

 

Where: this is the number one question that I am asked. On the micro level, as an estate agent, people ask me, “which road” and on the macro level as an investor people ask me “which town”. To answer the first question, I recommend speaking to local estate agents in the area of your choice. An experienced estate agent will know more about any pitfalls in a specific location than any amount of online research can possibly tell you. An example of this is that in my local area of Clapham/Balham (SW12/SW4) there are roads with a history of subsidence and Japanese Knotweed that I would avoid without relevant paperwork being in place. But also knowing the local school catchment areas and council boarders can make an enormous difference when searching for a tenant or eventually when you sell your investment. When searching for the right area to invest in there is always one sure-fire way to be sure of property value uplift and that is ‘infrastructure investment’. The closet and most recent example that I can refer to is the regeneration of Croydon Town Centre. A near £50,000,000 was pledged by the Mayor of London and the local council for the regeneration of Croydon Town Centre over the course of twenty years. At the same time, a raft of private institutions made huge capital commitments of around £1,000,000,000 which would see the area (in theory at least) transformed from a neglected –albeit well connected- town in the south of London, to a hub for young professionals and businesses. This announcement in early 2013 saw the average house price in Croydon rise by around 20% in the following year.

Now if you are based in the most northern peak of Scotland purchasing a property in South London may seem about as realistic to you as buying a Tiki Hut in Hawaii, but the distance really shouldn’t be an obstacle for you. Once you have identified a suitable area and carried out your basic online research you can start making calls to local Estate Agents and begin gathering more information. It is also important to begin building relationships -as painful as it sounds- with the Estate Agents on the ground as they are the gatekeepers to your investment. Once you feel as though you have enough information to make an educated decision you can take the plunge and visit the area (I would recommend on a weekday) and see as many properties as possible with your new-found estate agent friends. By the end of a day or two of viewings, you should feel comfortable enough to decide on a property and start the offer process. If all goes well you would have met an Estate Agent that you can trust and found a property that would be a suitable investment. From then on it is your choice if you choose to maintain and manage the property yourself or hire a management company to do the legwork for you….. if you are based in the most northern peak of Scotland I would probably recommend the latter.

 

I hope this introduction into buy-to-let investing was helpful to you. Please feel free to get in contact if you would like any further information. There is plenty to learn, so don’t stop reading and listening to opinions!

Property, our government and secondary problems.

Why can’t the government manage the property sector?

It is an interesting set of affairs when a conservative government chooses to increase taxes in any sector, but something doesn’t sit right with me when such a huge sweeping tax is brought in within the property sector. In an attempt to quell the purchases of multiple properties by budding investors and professional landlords a 3% stamp duty tax was introduced “if buying a new residential property means you’ll own more than one home”. There are ways around this tax if you ultimately sell your first home within 36 months of your new purchase, but the principle remains. It seems that our government is yet again dealing with secondary issues rather than the root cause of our problems. The heavily quoted line is that we are creating “generation rent”, baby boomers and those with inherited property wealth are gobbling up a disproportionate amount of properties and pushing prices up beyond what the average working person could ever hope to afford. One would assume that this would be a very simple challenge to tackle until it is counterbalanced – or rather unbalanced – by the fact that rental prices are too becoming unaffordable! My aborted attempt at an A level qualification may have come to an abrupt end before I reached the Advanced Structural Modelling module, but I made it through long enough to achieve an infantile grasp of ‘supply and demand’. It seems certain ministers and policy makers were not afforded the same prestigious education that I was in Merton College (not the one in Oxford).

Why would you focus your time and efforts on penalising buy-to-let investors who fuel the rental market and help to keep rental prices down or at least in equilibrium with sales prices, when your attention could be spent focussing on the fact that in London only 39’000 new homes were built or created and in 2016/2017 and the average population growth sits at around 150’000 annually over the past ten years. More broadly in the U.K. throughout 2017, 200,000 new homes built, but our population growth is averaging at somewhere around 500,000 per year. These figures make it clear that whilst the problem is intense in London, it is still also a problem –albeit a lesser one- nationwide. So improved transport links in and out of the city like the ones currently underway could help with the stress levels we are experiencing but it could hardly be deemed a lasting solution.

I had the underwhelming privilege of asking our then Housing Minister (now Conservative Party Chairman) Brandon Lewis in 2016 what we could do about the lack of houses being built and the stranglehold that local councils have on new developments. After the expected platitudes and politician garble the nuts and bolts of his solution was that “we are looking into the potential of ‘flat pack’ houses”. I was left wondering two things; does this minister have shares in IKEA and secondly does he even understand or realise the importance of my question? In reality our government is doing more than just simply “looking into flat pack houses”. The most recent interventions have been in a bid to make it easier for first time buyers to get onto the property ladder and make their first house purchases, these intervention have come in the form of Property ISAs and the Help To Buy scheme. The latter has seemed to work rather well, especially in London where the average first time buyer’s deposit is reported to be four times the average national wage. The Labour party have proposed Rent controls as their solution to the issue of rising rents but surely when you couple expensive purchase costs (assuming they would keep the additional 3% stamp duty) with capped rents we will see landlords flee from the market as their yields are decimated and capital growth is suppressed. Moreover this will leave a shortage in rental stock levels and force the government and local councils to increase the amount of properties that they are currently building. Now I’m not sure about your thoughts on the matter but that sounds like too much of lurch towards socialism for me and ultimately poses the question “where does the money come from?”. Neither of these options actually take control of the underling issue that we just simply do not build enough houses to sustain the population growth of this country.

Earlier when I mentioned Brandon Lewis’ response to my question I didn’t mean to single him out, as previous and subsequent housing ministers haven’t been able to tackle the question of how we tackle the property market’s perils either. But when you couple this apparent lack of action with the actual action that we are taking it seems as though we are wondering into a systematic attempt to tackle the sprawling branches of our problems rather than dig away at the root.

Patrick Henry

July 2018